Big week for the Bond Market

While it can certainly end up being nothing to remember in the big context, this past week has been an eventful one for US Treasuries.

For the past month or so Bond prices have been declining. When rates rise, it is generally because there is either an expectation for growth in the economy or, like in this case, an expectation of rising inflation due to seemingly unstoppable money printing by the FED and inconsiderate spending spree from the government.

It is important to clarify the inverse relationship between bond prices and their yields before we continue.

All things equal, bond investors are willing to pay a higher price for a higher yielding bond. When rates rise, bonds that pay a fixed interest rate set at a lower level become less attractive and vice versa. Say for example you purchased a 1 year bond that yields 5%. If rates rise and all of the sudden the same newly issued bond offers an 8% rate, the 5% bond you own will lose in value and you will get less tan Par at expiration because of it. Put simply, the 5% interest rate is lower than current market conditions therefore the bond is less attractive to investors.

As you can see from the graph below of the 10YR Treasury, the past 30 days we have seen a monster move from 1% all the way to the 1.6% level struck on February 25th. This movement wreaked havoc in financial markets with equities selling off significantly. On the week both stocks and bonds lost. The positive correlation is problematic for balanced portfolios as there is no place to hide.

US 10YR Treasury - 30 DAY

Given that US government bonds are supposed to be the most liquid market in the world, Thursday's actions could be seen as worrisome. The movement in yields was sparked by a very weak and somewhat illiquid 7-year Treasury Note auction.

Why did it happen?

In my humble opinion, the bond vigilantes could be back teasing the FED. They might be testing them to see if a QE taper is in the cards in the near future

What happens next?

I believe the FED will not reduce asset purchases and will do all it can to keep liquidity in markets. Therefore my guess is the reintroduction of yield curve control, a measure last utilized during WW2.

Inflation will continue to increase, the US$ will stay weak and commodities will continue to appreciate in value. In fact I expect a very strong 2021 for precious metals. Bitcoin will continue to benefit from this dynamic. Equities will rally.

Of course this is only my opinion. As always, allocate carefully.